Insight
SEC roundtable explores short-termism and the role of periodic reporting
I don't believe that to have effective liquidity you need a short-term focus. Too often in Washington we think there's a tradeoff of one thing for another. We should be looking for rules of the road that foster both liquidity and a long-term perspective.
—U.S. Securities and Exchange Commission Chairman Jay Clayton1
Continuing its probe into the relationship between the current disclosure framework and issuers’ ability to focus on long-term value creation, the U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance hosted a roundtable discussion on July 18, 2019, with panelists representing issuers, asset managers, law firms, auditors, stock markets, academia, and other corporate governance stakeholders.2 The roundtable served as a complement to the SEC’s “Request for Comment on Earnings Releases and Quarterly Reports,” which remains open for submissions.
SEC Chairman Jay Clayton framed the conversation around how the existing regulatory framework impacts liquidity choices (public vs. private) and corporate focus (long term vs. short term). SEC Commissioner Elad Roisman reinforced the need to ensure that public equity markets are working for retail investors with long-term outlooks.
Roundtable panelists addressed the following two questions:
1. Do U.S. capital markets have an excessive focus on the short term?
Participants generally agreed that the growing benefits for companies to remain private versus going public are not a result of short-termism in public markets, although short-term pressures do exist. The advancements in valuation and liquidity in private equity markets should both be celebrated and used as an impetus for reforms in the public market.
The higher regulatory burden, particularly the enactment of the Sarbanes-Oxley Act in 2002, was cited by some panelists as one of the factors in companies choosing to remain private. For example, the number of public companies decreased from more than 7,600 at their height in 1997 to about 3,600 in 2017.3 Panelists noted that companies may also be wary of the risk of potential litigation that stems from the disclosures required of public companies.4
One panelist suggested that while remaining private can shield an unprofitable company with long-term strategic plans for growth from short-term-oriented shareholders, public companies also have the means to educate their shareholder base about their long-term strategies and the possible rewards of patience. Other panelists pointed to those activist shareholders that target quick returns and expectations for management to meet quarterly earnings targets as short-term pressures that are unique to public companies. Throughout the discussion, panelists referenced a study in which more than half of financial executives responding to a survey indicated they would choose to “delay starting a new project” in order to meet a quarterly earnings target, even if doing so would result in decreased value creation.5
2. Should the SEC modify rules pertaining to the periodic reporting system?
There was a consensus among participants during the second panel that improvements could be made to the Form 10-Q, although views of its inherent value varied. As a point of reference, only 10 percent of respondents to a survey conducted by the Society for Corporate Governance said the current quarterly reporting process was not “complex and burdensome.”6
Because quarterly earnings releases are often published before the Form 10-Q and contain much of the same information, panelists representing issuers suggested the earnings release could be used in conjunction with the Form 10-Q to satisfy disclosure requirements and reduce the time and cost burdens associated with preparing the Form 10-Q. Others supported exploring the option to allow semiannual reporting for some categories of companies.
Investor representatives were reluctant to call for any decrease in the frequency or rigor of the existing reporting model, but they did express concern that the use of earnings guidance incentivizes management to adopt a short-term focus. Several participants requested the SEC discourage the use of quarterly earnings guidance—or at least reinforce that the SEC does not require it—while others doubted whether the SEC has the authority or desire to impede the issuance of guidance.
Nicolas Grabar, partner at Cleary Gottlieb Steen & Hamilton, summarized the panel’s suggestions to the SEC for streamlining the Form 10-Q:
- Work with the Financial Accounting Standards Board and accounting profession to promote simplification of the notes to the financial statements.
- Require financial statements only for the year to date, not the individual quarters.
- Allow alternative approaches to “Management’s Discussion and Analysis,” including comparing only to the prior period or comparing only to the year to date—with rulemaking, not just staff releases.
- Allow some information that is not subject to rapid change to be disclosed by other means, such as posting on a company website or an incorporated Form 8-K.
- Revisit eXtensible Business Reporting Language (XBRL) and explore technological developments to increase efficiency in the Form 10-Q development process.
- Use the bully pulpit with preparers and the auditing profession to make this move toward streamlining and simplification.
It remains to be seen what, if any, action the SEC will take on the panelists’ suggestions and the responses to its request for comment. To submit a comment to the SEC on this topic, visit the SEC site here.
1 U.S. Securities and Exchange Commission Chairman Jay Clayton, “Statement at the SEC Staff Roundtable on Short-Term/Long-Term Management of Public Companies, Our Periodic Reporting System and Regulatory Requirements,” [public statement] July 18, 2019.
2 SEC webcast archive, July 18, 2019, accessed July 31, 2019.
3 Editorial Board, “Where Have All the Public Companies Gone?” Bloomberg Opinion (April 9, 2018).
4 Research suggests this sharp drop in public companies may also be attributed to the decline in the number of initial public offerings specifically by micro-cap companies after the burst of the tech bubble. See James J. Rowley Jr. and Haifeng Wang, PhD, “What’s behind the falling number of public companies?” Vanguard Research, November 2017.
5 John R. Graham, Campbell R. Harvey, and Shivaram Rajgopal, “The Economic Implications of Corporate Financial Reporting,” (January 11, 2005), p. 16.
6 Society for Corporate Governance, “Request for Comment on Earnings Releases and Quarterly Reports--File Number S7-26-18,” (April 19, 2019), p. 2.
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